Double Tax Treaty between Cyprus and Russia – Clarification of Direct Investment requirement

On 23 February 2018 the Russian Ministry of Finance (MoF) issued a clarification with regards to the interpretation of the term “direct investment” in relation to dividends as per the Double Tax Treaty (DTT) between Cyprus and Russia of 1998, as amended in 2010. The clarification is based on what was agreed by the competent authorities of Russia and Cyprus on this matter.

The DTT provides that dividends paid by a company resident in one of the contracting states to a resident of the other contracting state may be taxed in that other state. However, such dividends may also be taxed in the country of origin based on the laws of that state, but if the beneficial owner of the dividends is a resident of the other state the tax so charged may not exceed:

–      5% of the gross amount of the dividends if the beneficial owner has directly invested in the capital of the company paying the dividends the equivalent of at least EUR 100,000; and

–      10% of the gross amount of the dividends in all other cases.

As per the clarification provided by the MoF, the term "directly invested" refers to the acquisition of a company's shares during an initial and subsequent issue of shares, an acquisition through a stock market or directly from the previous owner. The EUR 100,000 investment requirement applies directly to each separate company regardless of the relationship between the parent company and the subsidiaries. Therefore, the term "direct investment" refers to the investment made directly by the beneficiary.

The value of the investment is established using the amount actually paid for the acquired shares and other rights to participate in the dividend payer's profits, adjusted if necessary in order to be in line with market prices used by independent parties (i.e. at arm's length). This calculation is only done once at the date of the acquisition and can not be recalculated on the date of any dividend payment.

Based on the clarifications provided, for a Cyprus company which acquired shares in a Russian subsidiary directly from the previous owner, the direct investment for DTT purposes must be determined based on the actual amount paid as per the share purchase agreement.

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